Aris Mining Corp. Q4 FY2023 earnings call

• 2023 was a strong year with 16% volume growth, margin recapture, and disciplined capital allocation.
• 2023 adjusted EBITDA was $175 million, up 17% and exceeding guidance.
• Produced water volumes increased 19% and water solutions volumes 9% year-over-year.
• Electrification projects reduced rental equipment and diesel fuel expenses by approximately $7.6 million annually, with further savings expected in 2024.
• Piloting technologies for produced water beneficial reuse and evaluating desalination and mineral extraction with industry partners.

In the produced water business, the fourth quarter averaged 1.1 million barrels per day, with produced water volumes up 19% year-over-year. Skim oil recovery averaged approximately 1,360 barrels per day in the fourth quarter. The water solutions business saw fourth quarter volumes higher than anticipated, with water solutions volumes up 9% year-over-year, and sold 482,000 barrels of water per day in the fourth quarter, growing 5% sequentially and 32% year-over-year. Revenue contribution details weren't explicitly broken down by segment percentage in the transcript but key volumes and growth are highlighted.

• 2024 produced water volume expected 1.02 to 1.07 million barrels per day, up approximately 2% to 5% year-over-year after adjusting for asset divestitures.
• Skim oil recovery forecasted at approximately 1,300 barrels per day.
• Water solutions full year volumes expected 430,000 to 470,000 barrels per day.
• 2024 adjusted EBITDA guidance $180 million to $200 million.
• Capital expenditures expected $85 million to $105 million, a ~40% reduction from 2023.
• Free cash flow guidance $45 million to $65 million.

Q: How would you stack the priority for excess cash flow here given your – under your leverage target? And where would M&A fall on that?

A: In terms of priorities, we’re thinking about everything. So in terms of sort of responding as to what we’re going to do, I think it’s early. We have those conversations all the time. Obviously, there’s the buybacks, there’s the dividend, there’s the paying down debt. We are going to continue to evaluate that and just expect to be – talk to everybody about that later in the year.

Q: It seems that the first quarter seems to be flat at the midpoint sequentially, but with upside to be better. Is that upside, could that come from a carryforward from a better fourth quarter? And understanding that there is a seasonality factor here, it seems as though the first quarter is higher than the full year guide. Could you give us your thoughts on how volumes should trend throughout the year?

A: When you look at some of the public commentary from some of our larger customers, they’ve indicated some of the volume profile they expect throughout the year. And so a lot of that flows into our own internal forecasts. When we provide our outlook, we do get about 6 months’ notice from our customers. We have a very good line of sight in the first half of the year, and we do start working further out beyond that. But when we’re providing guidance around the volumetric outlook, we’re very deliberate around what we put out based on what we know and what we’re confident in. So as we move through the year, we’ll see where our customers come out with refined volumes. There could be upside from greater activity as we get to the back half of the year.

Q: You mentioned further margin improvement for 2024. And you mentioned that there may be further efficiency initiatives on the cost side. What specifically are those initiatives for 2024? And in that context, when you look at better margin guidance for the year, is that what’s driving the higher outlook here? Or fees also doing some of that work?

A: When we look at our operations, we are constantly looking to places that we can drive costs down. So when I think about ‘24 and working with the team, we’re going to be very focused on the reuse area, chemicals across the system, labor productivity, also very focused on waste and filtration and what we can do to reduce costs in those areas. We will have some continued electrification, which will continue to drive costs down. Jackie, it’s really a combination of things, looking across our entire portfolio and being very deliberate as we sort of manage our cost and identify opportunities for efficiency. In terms of margins driving, it is a margin story on rates. We have set rates, but we – from those set rates, as you know, from our contracts, we have the revenue reset with CPI. And we have CPI really that comes across the year with two big adjustments at the end of March, at the end of Q2, actually Q3 and then in January. So it’s a function of rates and margin.

Q: You alluded to potentially increasing shareholder returns. Should we expect a dividend raise in 2024, or otherwise, what color can you add for those potential to increase shareholder returns?

A: As you saw in the press release and in our financial statements, our leverage is very low relative to our targets, so no need to allocate capital to further debt reduction at this time. So, that leads you to either dividends or share repurchases. Repurchases would exacerbate some of the issues we see from the low float that’s out there. But when you step back, we are a far cry from where we think the intrinsic value of our stock is. And so there is some compelling value when we look at potential repurchases. So, dividends, repurchases or accommodation of both are on the table. We are working through that. And as Amanda said, we will be back to you guys here later in the year.

Q: You made big strides on connecting your facilities to the grid last year. Can you remind us where you are in that process? Are you over halfway in connecting everything to the grid now? And what kind of savings do you expect this year from those efforts?

A: When we originally announced that we had 19 locations we are going to connect, at this point, we have got 16 of those done. We do have two additional facilities we have added to the list, so there is five remaining out of that 21. And at this point, we are mostly waiting on Xcel, the regulated utility to get there. So, we are in the queue, but we are at the mercy a little bit but we have made significant progress. On the recycling facilities, we do have another two locations there. So, well over the halfway mark, but we will see some incremental margin improvement this year from those. As you know, Don, we indicated that we hope to achieve $7.5 million savings by actually connecting all of those systems. And we finished the year with more to go and actually achieving $7.6 million in savings.

Q: I just want to start with, in your opening comments, you talked about how higher spot volumes were helpful. And so maybe you could just talk about what really drove that. And then as well as we are two months into the first quarter, how you saw that cadence progress as we moved into the New Year.

A: We mentioned the higher spot volumes. We were able to bring those in. And what we have talked about is when there is availability on our system going out to our customers and bringing volumes in on an interruptible basis. That’s as it relates to disposal. What we were really referring to is bringing in additional water solutions business that’s a much shorter-cycle business. And you are looking constantly for opportunities where somebody may need additional water for completions. And so in Q4, we mentioned bringing in some volumes from Q1 ‘24 and also being able to sort of win additional business. It’s just very fluid, and we are well positioned with geographic reach and the number of recycling locations we have to actually win additional spot business.

Q: I think you referenced sort of 1,360 barrels of skim oil, and then your guidance is 1,300. So is that just conservatism, because if you expect volumes to ramp across your system, we naturally expect that to move higher as well.

A: So, it’s a level of looking at what we tend to get over time. When we mentioned the 1,036 skim oil barrels, we also indicated that it seemed to be higher as a consequence of flow back. We also had some benefit of price. And so we do see some lumpiness in those skim volumes. So, we are just estimating that over the year, we will sort of have steady state at that 1,300 barrels a day.

Q: When you think about how important water recycling is to your customers, their ESG goals, and perhaps high switching costs, I am not sure if that’s right or not, but I would think so. How will that ultimately influence pricing strategy as contracts mature years down the road? I feel like pricing could have got higher over time.

A: John, I don’t think you have ever had a rookie question, but good question. So, yes, the relationships we have with our customers and as a consequence of the physical infrastructure we have and the volumes we aggregate in order to deliver these large quantities of water to our customers as they need more and more with these multiple fracs, the relationships are very sticky. I think as contracts roll off and as there is more demand in the basin for reuse versus groundwater, for example, I do think that there will be pricing power. We will also see some pricing power and rate increase over time in our disposal business as volumes just over the basin continue to increase.

Q: When big company A buys big company B, your customer? They have got a different water infrastructure partner. How quickly do they want to change? Do they change?

A: Our contracts, which are long-term contracts with our customers, are sort of covenants running with the land. So, what that means is even if they sell or consolidate, they will still have that contract in effect. So, we have contractual support. But Bill, why don’t you respond to that? Bill Zartler: John, probably we have seen that happen with Concho rolling into Conoco. And as the relationship already and continue to get more business from Conoco along the way. And so the takeaway piece of this and the infrastructure required is this is a midstream business. These are long-term contracts. But in order to facilitate the oilfield servicing part of this, if you will, the water recycling that’s in high demand, you would have to have the infrastructure in place to be able to deliver and control those volumes, which we do under those contracts. And so the stickiness is around the infrastructure and its ability to perform more than it is the relationship per se. And so I think that, ultimately, the sticky part of that business is that we will perform virtually 100% of the time because the infrastructure is there. The buffer pumps are there, the pumps are there, the massive amounts of their water plus other people’s water that we can blend and treat and redeliver for these big trucks is just impossible to replicate.